(1)Lufkin Trailer Corporation assembles up to 30 trailers per month for 18wheel trucks inits east coast facility.

Production has dropped to 25 units per month over the last 5 months due to a worldwide economic slow down in transportation services. The following information is available. Fixed costs FC = $750,000 per month Variable cost per unit v = $35,000 Revenue per unit r = $75,000 (a) How does the reduced production level of 25 units per month compare with the CUJTent breakeven point? (b) What is the current profit level per month for the facility? (c) What is the difference between the revenue and variable cost per trailer that is necessary to break even at a monthly production level of 15 units, if fixed costs remain constant? Solution (a) Use Equation [13.2] to determine the breakeven number of units. All dollar amounts are in $1000 units. Q = ~ BE r - v 750/75 - 35 = 18.75 units per month Figure 13-4 is a plot of Rand TC lines. The breakeven value is 18.75, or 19 in integer trailer units. The reduced production level of 25 units is above the breakeven value. (b) To estimate profit in $1000 at Q = 25 units per month, use Equation [13.1]. Profit = R - TC = rQ - (FC + vQ) = (r - v)Q - FC

= (75 - 35)25 - 750 = $250 There is a profit of $250,000 per month currently. (c) To determine the required difference r - v, use Equation [13.3) with profit = 0, Q = 15, and FC = $750,000. In $1000 units, o = (r - v)(15) - 750 r - v = 750/15 = $ 50 per unit The spread between r and v must be $50,000. If v stays at $35,000, the revenue per trailer must increase from $75,000 to $85,000 just to break even at a production level of Q = 15 per month. (2) The pres ident of a local company, Online Ontime, Inc., expects a product to have a profitable life of between 1 and 5 years. He wants to know the breakeven number of units that must be sold annually to realize payback within each of the time pedods of 1 year, 2 years, and so on up to 5 years. Find the answers using hand and computer solutions. The cost and revenue estimates are as follows: Fixed costs: initial investment of $80,000 with $1000 annual operating cost. Va riable cost: $8 per unit. Revenue: Twice the variable cost for the first 5 years and 50% of the variable cost thereafter. Solution by Hand Define X as the units sold per year to break even and np as the payback period, where np = 1, 2, 3, 4, and 5 years. There are two unknowns and one relation, so it is necessary to establish values of one variable and solve for the other. The following approach is used: establi sh annual cost and revenue relations with no time value of money considered, then use np values to find the breakeven value of X. Fixed costs --- (80000/np)+ 1000 Variable cost 8X Revenue : 16X(years 1 through 5), 4X(year 6 and thereafter) Set revenue equal to total cost, and solve for X.

Revenue = total cost 16X = (80,000/np) + 1000 + 8X X= (10000/np)+125 [13 .5] Insert the values 1 through 5 for np and solve for X (Figure 13- 5). For example, payback in 2 years requires sales of 5125 units per year in order to break even. There is no consideration of interest in this solution; that is, i = 0%. (3) A small aerospace company is evaluating two alternatives: the purchase of an automatic feed machine and a manual feed machine for a finishing process. The auto-feed machine has an initial cost of $23,000, an estimated salvage value of $4000, and a predicted life of 10 years. One person will operate the machine at a rate of $12 per hour. The expected output is 8 tons per hour. Annual maintenance and operating cost is expected to be $3500. The alternative manual feed machine has a first cost of $8000, no expected salvage value, a 5-year life, and an output of 6 tons per hour. However, three workers will be required at $8 per hour each. The machine will have an annual maintenance and operation cost of $1500. All projects are expected to generate a return of 10% per year. How many tons per year must be finished in order to justify the higher purchase cost of the autofeed machine? Solution Use the steps above to calculate the breakeven point between the two alternatives. 1. Let x represent the number of tons per year. 2. For the auto-feed machine the annual variable cost is Annual VC =( $12 / hour) x (1hour/ 8 tons) x (x tons/ year)= 1.5x The VC is developed in dollars per year. The AW expression for the autofeed machine is AWau10 = - 23 ,000(A / P,1O%,1O) + 4000(A/ F, I 0%,10) - 3500 - 1.5x = $ - 6992 - 1.5x Similarly, the annual variable cost and AW for the manual feed machine are Annual VC =($8 / hour )x(3 operators)x(1hour/ 6 tons)x(x tons/year) = 4x AWmanual = - 8000(A / P,10%,5) - 1500 - 4x = $-3610 - 4x 3. Equate the two cost relations and solve for x. A W auto = A W manual

-6992 -1.5x = -3610 - 4x x = 1353 tons per year 4. If the output is expected to exceed 1353 tons per year, purchase the auto-feed machine, since its VC slope of 1.5 is smaller than the manual feed VC slope of 4. (4) QBE = 1,000,000/(8.50-4.25) = 235,294 units (5) From Equation [13.4], plot Cu = 160,000/Q+4. (a) If Cu = $5, from the graph, Q is approximately 160,000. If Q is determined by Equation [13.4], it is 5 = 160,000/Q + 4 Q = 160,000/1 = 160,000 units (b) From the plot, or by equation, Q = 100,000 units. Cu = 6 = 200,000/Q + 4 Q = 200,000/2 = 100,000 units

(6) FC = $305,000 (a)

v = $5500/unit

Profit = (r v)Q FC 0 = (r 5500)5000 305,000 (r 5500) = 305,000 / 5000 r = $5561 per unit

(7) Let x = hours per year

-800(A/P,10%,3) - (300/2000)x -1.0x = -1,900(A/P,10%,5) - (700/8000)x 1.0x -800(0.40211) - 0.15x - 1.0x = -1,900(0.2638) 0.0875x - 1.0x x = 2873 hours per year (8) (a) Let x = breakeven days per year. Use annual worth analysis. -125,000(A/P,12%,8) + 5,000(A/F,12%,8) - 2,000 - 40x = -45(125 +20x) -125,000(0.2013) + 5,000(0.0813) - 2,000 - 40x = -5625 900x x = 24.6 days per year (b) Since 75 > 24.6 days, buy. Annual cost is $-29,756 (9) Let x = yards per year to breakeven (a) Solution by hand -40,000(A/P,8%,10) - 2,000 -(30/2500)x = - [6(14)/2500]x -40,000(0.14903) - 2,000 - 0.012x = -0.0336x x = 368,574 yards per year (10) (a) By hand: Let P = first cost of sandblasting. Equate the PW of painting each 4

10,033(P/F,10%,28) - 12,039(P/F,10%,32) 14,447(P/F,10%,36)

= $-13,397 PW of sandblasting PWs = -P - 1.4P(P/F,10%,10) - 1.96P(P/F,10%,20) 2.74P(P/F,10%,30) -P[1 + 1.4(0.3855) + 1.96(0.1486) + 2.74(0.0573)] = -1.988P

Equate PW relations to obtain P = $6,739

years to PW of sandblasting each 10 years, up to 38 years.

PW of painting PWp = -2,800 - 3,360(P/F,10%,4) - 4,032(P/F,10%,8) 4,838(P/F,10%12) 5,806(P/F,10%,16) - 6,967(P/F,10%,20) -8,361(P/F,10%,24)